Canada: Can An Arbitration Award Be Set Aside For Unreasonableness?

If an arbitration agreement states that there is to be no appeal
from the award under the agreement, can a party seek judicial
review on the ground that the award is unreasonable?

In Dunsmuir v. New Brunswick, [2008] 1
S.C.R. 190, the Supreme Court of Canada set out a comprehensive
analysis for the judicial review of the decisions of administrative
tribunals. The Court held that there are two tests for determining
the legal validity of the decisions of those tribunals:
correctness and reasonableness. Generally speaking,
the Court held that an administrative tribunal cannot, by legal
error, assume a jurisdiction it does not have. True questions of
statutory jurisdiction must be correctly decided by the tribunal,
and therefore may be reviewed on the basis of correctness. All
other decisions will not be set aside unless they are unreasonable,
with the degree of deference being shown to the tribunal's
decision depending on the nature of the decision (the
"Dunsmuir test").

Is the unreasonableness test a proper one to apply to an
arbitral award when the parties have agreed that there shall be no
appeals from the award? That is the question that was raised in the
recent case of Parmalat Canada Inc. v. Ontario
Teachers' Pension Plan Board. While the court did
not refer to or address this issue in its decision, this case
provides a good opportunity to discuss whether the Dunsmuir test
should apply to the review of an award under a commercial
arbitration agreement.

Factual Background

During 2003 to 2005, Parmalat Canada refinanced itself to avoid
default on its financial obligations. Its predicament arose from
the financial collapse of its Italian parent. Parmalat Canada
entered into a Credit Agreement with Ontario Teachers' Pension
Plan Board (Teachers) whereby Teachers provided $530 million in
financing to Parmalat Canada.

One of the agreements which Parmalat Canda and Teacher entered
into was a Liquidity Payment Agreement ("LPA"). Under the
LPA, Parmalat Canada agreed to pay Teachers a Liquidity Payment
equal to 10 per cent of the value of Parmalat Canada if a Liquidity
Event occurred within seven years of the closing of the Credit
Agreement. That closing occurred on June 29, 2004. The definition
of Liquidity Event included an "Indirect Change of
Control" which included "any Person or Persons, acting
jointly and in concert, acquiring, directly or indirectly,
....securities or the right to vote securities of Parmalat Italy
carrying any number of votes where thereafter a majority of the
board of directors of Parmalat Italy are nominees of such Person or
Persons."

On June 28, 2011, or one day before the seventh anniversary of
the closing of the Credit Agreement, a slate of director nominated
by Group Lactalis S.A. was elected to the board of directors of
Parmalat Italy. In March 2011, Lactalis had acquired 28.97 % of the
shares of Parmalat Italy. That purchase enabled Lactalis to elect
its slate of directors, who were elected on June 28, 2011.

The Arbitration

Teachers then commenced an arbitration asserting that a
Liquidity Event had occurred and that Parmalat Canada was required
to pay the Liquidity Payment to Teachers. Teachers relied upon the
plain language of the agreement and asserted that, under that
language, a Liquidity event had occurred and the Liquidity Payment
was due to it.

Parmalat Canada took the position that a significant liquidity
or realization of value must result from any transaction for it to
qualify as a Liquidity Event. It argued that there must be a value
realization and/or liquidity, which in turn would fund the
Liquidity Payment, for a Liquidity Event to have occurred.

The Arbitrator found that the acquiring shareholder Lactalis,
being able to elect its slate of directors on June 28, 2011,
thereby gained control of Parmalat Italy. The Arbitrator applied
the plain reading of the agreement and concluded that a Liquidity
Event had occurred. Under the LPA, the decision of the Arbitrator
was final and binding with no appeal.

Does Dunsmuir Apply?

Parmalat Canada applied to the Superior Court to set aside the
arbitrator's award under section 46 of the Ontario
Arbitration Act, 1991. Among other arguments, it submitted
that the arbitrator's decision was unreasonable. It relied on
the Dunsmuir decision of the Supreme Court of Canada, and
other decisions of the Supreme Court in which that court had
applied the Dunsmuir test in its review of two arbitration
decisions. Parmalat Canada referred to my article of January 22,
2012 in which I reviewed those two decisions and discussed the
potential application of Dunsmuir outside the
administrative law context.

Parmalat Canada also relied upon the decision of the Ontario
Court of Appeal in Smyth v. Perth and Smith Falls
District Hospital (2008) 92 OR 3d 656 in which the
Court of Appeal applied Dunsmuir in its review of an
arbitration decision.

Smyth concerned an arbitration relating to the
appointment of a doctor to the staff of a hospital. The arbitration
agreement provided that there was to be no appeal to the court from
the arbitrator's decision. The arbitrator decided that the
doctor should be given the opportunity to resign or his appointment
to the hospital should be terminated. The doctor sought to have the
award reviewed under section 46 of the Ontario Arbitration Act,
1991. The superior court judge applied the test of
correctness, held that the arbitrator had incorrectly exercised his
jurisdiction and overturned the arbitrator's decision. The
Court of Appeal applied Dunsmuir, held that the
reasonableness test should apply, found that the arbitrator's
decision was reasonable and set aside the superior court
judge's decision.

In my article of January 22, 2012, I commented on the decisions
of the Supreme Court of Canada in Nor-Man Regional Health Authority
v. Manitoba Association of Health Care Professionals, 2011 SCC 59
and Newfoundland and Labrador Nurses Union v. Newfoundland and
Labrador (Treasury Board) 2011 SCC 62. In both those cases, the
Supreme Court upheld a labour arbitration award applying the
reasonableness standard in Dunsmuir. I said in my article
that those cases are powerful supports for person seeking to uphold
arbitration awards.

None of these cases involved commercial arbitrations. In none of
these decisions did the court determine whether the reasonableness
test is a proper test for the review of the decisions of arbitral
tribunals under commercial arbitration agreements, particularly
when the parties have agreed that there is no appeal from an
arbitral decision. That issue remains to be decided by Canadian
courts.

What are the arguments for and against the application of a
reasonableness test to commercial arbitrations?

The Rationale For Applying Dunsmuir

The arguments for the application of a reasonableness test have
been stated in Dunsmuir and the other Supreme Court of
Canada decisions applying Dunsmuir. A quote from Dunsmuir
was cited in Smyth and sets out its rationale:

Reasonableness is a deferential standard animated by the
principle that underlies the development of the two previous
standards of reasonableness: certain questions that come before
administrative tribunals do not lend themselves to one specific,
particular result. Instead, they may give rise to a number of
possible, reasonable conclusions. Tribunals have a margin of
appreciation within the range of acceptable and rational solutions.
A court conducting a review for reasonableness inquires into the
qualities that make a decision reasonable, referring both to the
process of articulating the reasons and to outcomes. In judicial
review, reasonableness is concerned mostly with the existence of
justification, transparency and intelligibility within the
decision-making process. But it is also concerned with whether the
decision falls within a range of possible, acceptable outcomes
which are defensible in respect of the facts and law.

In Nor-Man, the Supreme Court of Canada explained the
reason for applying the reasonable test from Dunsmuir as
follows:

The standard of reasonableness, on the other hand, normally
prevails where the tribunal's decision raises issues of fact,
discretion or policy; involves inextricably intertwined legal and
factual issues; or relates to the interpretation of the
tribunal's enabling (or "home") statute or
"statutes closely connected to its function, with which it
will have particular familiarity" (Dunsmuir, at
paras. 51 and 53-54; Smith, at para. 26).

Similarly, in Newfoundland and Labrador Nurses
Union, the Supreme Court of Canada said the
following in support of its application of the Dunsmuir
reasonableness standard to a labour arbitrator's decision,
referring to Professor Dyzenhaus' explanation of
Dunsmuir:

This, I think, is the context for understanding what the Court
meant in Dunsmuir when it called for "justification,
transparency and intelligibility". To me, it represents a
respectful appreciation that a wide range of specialized
decision-makers routinely render decisions in their respective
spheres of expertise, using concepts and language often unique to
their areas and rendering decisions that are often
counter-intuitive to a generalist. That was the basis for this
Court's new direction in Canadian Union of Public
Employees, Local 963 v. New Brunswick Liquor Corp.,
1979 CanLII 23 (SCC), [1979] 2 S.C.R. 227, where Dickson J.
urged restraint in assessing the decisions of specialized
administrative tribunals. This decision oriented the Court towards
granting greater deference to tribunals, shown in
Dunsmuir's conclusion that tribunals should "have
a margin of appreciation within the range of acceptable and
rational solutions" (para. 47).

These expressions of the rationale behind the reasonableness
test are largely based upon the statutory jurisdiction of
administrative tribunals. Even labour arbitrators are usually
exercising their authority in the context of arbitration mandated
by statute. The statutory source of jurisdiction justifies the
court imposing a standard of reasonableness on the arbitrator's
reasons for decision.

Does this rationale apply when the parties have quite
voluntarily chosen arbitration as their dispute resolution
mechanism and have agreed that there shall be no appeal to the
courts?

The Rationale For Not Applying Dunsmuir

The argument that it does not can conveniently be started by
examining the Ontario International Commercial Arbitration
Act (ICAA) and the Model Law attached to it. That Model Law
has been adopted by many countries around the world. Pursuant to
that Model Law, international commercial arbitration decisions are
rendered and enforced around the world. Under Article 34(1) of the
Model Law, recourse to a court against an arbitral award may be
made only by an application for setting aside in accordance
with that article. No right of appeal is provided in the Model Law.
Article 34(2) of the Model Law says that an award may be set aside
by the court only on the following grounds:

(i) a party to the arbitration agreement was under some
incapacity; or the said agreement is not valid under the law to
which the parties have subjected it or, failing any indication
thereon, under the law of this State, or

(ii) the party making the application was not given proper
notice of the appointment of an arbitrator or of the arbitral
proceedings or was otherwise unable to present his case, or

(iii) the award deals with a dispute not contemplated by or not
falling within the terms of the submission to arbitration, or
contains decisions on matters beyond the scope of the submission to
arbitration, provided that, if the decisions on matters submitted
to arbitration can be separated from those not so submitted, only
that part of the award which contains decisions on matters not
submitted to arbitration may be set aside, or

(iv) the composition of the arbitral tribunal or the arbitral
procedure was not in accordance with the agreement of the parties,
unless such agreement was in conflict with a provision of this Law
from which the parties cannot derogate, or, failing such agreement,
was not in accordance with this Law; or

(b) the court finds that:

(i) the subject-matter of the dispute is not capable of
settlement by arbitration under the law of this State, or

(ii) the award is in conflict with the public policy of this
State.

This is a pretty comprehensive list of grounds to set aside an
award. Yet, nothing in Article 34(2) says that the substance of the
award must be correct or reasonable, or that the arbitral tribunal
must be correct or reasonable except with respect to jurisdiction
or one of the other matters expressly stated in Article 34(2).
Indeed, under Article 31(2) with the consent of the parties the
arbitral tribunal need give no reasons. It must be assumed that the
drafters of the Model Law envisaged that, sometime and somewhere,
an international commercial arbitration panel might issue an award
which was legally or factually incorrect or unreasonable. But no
relief on those grounds was afforded in the Model Law.

If a Canadian court is asked to apply the Dunsmuir test to an
award of an international commercial arbitration, on what basis
could it do so? Would it say that simply because the award is
unreasonable, then under Article 34(2)(iii) it does not fall within
the terms of the submission to arbitration, or it contains
decisions on matters beyond the scope of the submission to
arbitration, or deals with matters not remitted to the tribunal?
Can that be said when the Model Law does not require that the award
be reasonable or correct?

Of course, if there is a true jurisdictional challenge to the
award, then Article 34(2) (iii) will apply and the court will have
to decide that issue using an appropriate jurisdictional test. But
apart from that situation, the application of the reasonableness
standard to the merits of the arbitral award does not appear to fit
comfortably within Article 34.

If Canada applies a reasonableness standard to international
arbitration awards outside of true jurisdictional issues, then it
may apply a test that no other country applies to the Model Law,
even though that Law was adopted by many countries for the purpose
of uniformity.

Turning to the domestic Ontario Arbitration Act, 1991,
section 46(1) states that an arbitral award may be set aside on the
following grounds:

1. A party entered into the arbitration agreement while under a
legal incapacity.

2. The arbitration agreement is invalid or has ceased to
exist.

3. The award deals with a dispute that the arbitration agreement
does not cover or contains a decision on a matter that is beyond
the scope of the agreement.

4. The composition of the tribunal was not in accordance with
the arbitration agreement or, if the agreement did not deal with
that matter, was not in accordance with this Act.

5. The subject-matter of the dispute is not capable of being the
subject of arbitration under Ontario law.

6. The applicant was not treated equally and fairly, was not
given an opportunity to present a case or to respond to another
party's case, or was not given proper notice of the arbitration
or of the appointment of an arbitrator.

7. The procedures followed in the arbitration did not comply
with this Act.

8. An arbitrator has committed a corrupt or fraudulent act or
there is a reasonable apprehension of bias.

9. The award was obtained by fraud.

10. The award is a family arbitration award that is not
enforceable under the Family Law Act.

Once again, this section provides a very comprehensive basis for
setting aside arbitral awards, but does not state that correctness
and reasonableness are separate tests for doing so. Except as a
test to determine whether the arbitral tribunal had jurisdiction to
determine the dispute or whether the tribunal has applied one of
the other factors mentioned in section 46(1), the reasonableness
test does not seem to fit well within that subsection.

Section 46 is found within a particular statutory setting as a
separate test. Section 6 says that courts shall not intervene
except for express statutory purposes. Section 45(1) provides a
right to seek leave to appeal from an arbitral award unless the
parties have agreed otherwise. Section 45(2) and (3) allow the
parties to agree on an appeal on questions of law and fact. So the
parties are afforded by statute the broadest right to agree on
recourse to the courts to review the award. When the parties agree
that there will be no appeal, they know that the award could
possibly be in error or unreasonable, but they chose expedition and
finality over legal perfection. In that context, a review of the
decision based on reasonableness -outside the pure jurisdictional
context under section 45(1).3 - seems difficult to justify.

The Parmalat Decision

Returning to the Parmalat Canada decision, Parmalat
Canada argued that the interpretation of the LPA was unreasonable
as it allegedly did not take into account the meaning of the word
"liquidity" and common sense need for a transaction or
other liquidity event to fund the Liquidity Event. Fitting that
argument within the specific grounds for review found in section 46
of the Arbitration Act, 1991 was the challenge. Justice
Cumming found that the arbitrator's decision was reasonable so
he did not have to decide whether the award could be set aside if
it was unreasonable.

Conclusion

The challenge for those who support the application of
the Dunsmuir test to commercial arbitrations is to show that the
administrative law rational for Dunsmuir applies to
commercial arbitrations, and that the test can be useful or
justified notwithstanding the limited right of courts to review
awards of domestic and international arbitrations.

The challenge for those who oppose the application of
Dunsmuir to commercial arbitration awards is to show that
the administrative law rational for Dunsmuir does not
apply in the commercial arbitration setting, and that the grounds
for reviewing a commercial arbitration are sufficiently and
definitively stated in the arbitration statutes and leave no need
or room for Dunsmuir except in relation to true
jurisdictional issues.

So far, there has been no real debate on these issues. In
Smyth, the Dunsmuir test was applied to an arbitration in
a hospital setting, as a convenient and apparently governing
authority but without considering whether the rationale and the
statutory setting justified that application outside a pure
jurisdictional dispute. Let the debate begin.

See Heintzman and Goldsmith on Canadian Building
Contracts(4th ed.), chapter 10

There are a number of reasons an employer may retain a lawyer to conduct an investigation: investigative experience, to avoid a potential or actual conflict of interest, to avoid potential bias and the perception thereof, ...

In Lavender v. Miller Bernstein LLP, Justice Belobaba heard a motion by the representative plaintiff for summary judgment on several of the common issues certified in the class proceeding against the defendant auditor.

In what is being hailed as a landmark decision, the Canadian Supreme Court has affirmed a holding granting a global injunction against Google, even though it was a non-party to the underlying infringement action, requiring it to remove links from infringing websites from its global search results.

This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).

Email Address

Company Name

Password

Confirm Password

Position

Mondaq Topics -- Select your Interests

Accounting

Anti-trust

Commercial

Compliance

Consumer

Criminal

Employment

Energy

Environment

Family

Finance

Government

Healthcare

Immigration

Insolvency

Insurance

International

IP

Law Performance

Law Practice

Litigation

Media & IT

Privacy

Real Estate

Strategy

Tax

Technology

Transport

Wealth Mgt

Regions

Africa

Asia

Asia Pacific

Australasia

Canada

Caribbean

Europe

European Union

Latin America

Middle East

U.K.

United States

Worldwide Updates

Check to state you have read and agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you
are granted a non-exclusive, revocable license to access the Website under its
terms and conditions of use. Your use of the Website constitutes your agreement
to the following terms and conditions of use. Mondaq Ltd may terminate your use
of the Website if you are in breach of these terms and conditions or if Mondaq
Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to
read the full text of the content and articles available (the Content). You may
not modify, publish, transmit, transfer or sell, reproduce, create derivative
works from, distribute, perform, link, display, or in any way exploit any of the
Content, in whole or in part, except as expressly permitted in these terms &
conditions or with the prior written consent of Mondaq Ltd. You may not use
electronic or other means to extract details or information about Mondaq.com’s
content, users or contributors in order to offer them any services or products
which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the
suitability of the information contained in the documents and related graphics
published on this server for any purpose. All such documents and related
graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or
its respective suppliers hereby disclaim all warranties and conditions with
regard to this information, including all implied warranties and conditions of
merchantability, fitness for a particular purpose, title and non-infringement.
In no event shall Mondaq Ltd and/or its respective suppliers be liable for any
special, indirect or consequential damages or any damages whatsoever resulting
from loss of use, data or profits, whether in an action of contract, negligence
or other tortious action, arising out of or in connection with the use or
performance of information available from this server.

The documents and related graphics published on this server could include
technical inaccuracies or typographical errors. Changes are periodically added
to the information herein. Mondaq Ltd and/or its respective suppliers may make
improvements and/or changes in the product(s) and/or the program(s) described
herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally
identifies you, including what sort of information you are interested in, for
three primary purposes:

To allow you to personalize the Mondaq websites you are visiting.

To enable features such as password reminder, newsletter alerts, email a
colleague, and linking from Mondaq (and its affiliate sites) to your website.

Mondaq (and its affiliate sites) do not sell or provide your details to third
parties other than information providers. The reason we provide our information
providers with this information is so that they can measure the response their
articles are receiving and provide you with information about their products and
services.

If you do not want us to provide your name and email address you may opt out
by clicking here .

If you do not wish to receive any future announcements of products and
services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to
view the free information on the site. We also collect information from our
users at several different points on the websites: this is so that we can
customise the sites according to individual usage, provide 'session-aware'
functionality, and ensure that content is acquired and developed appropriately.
This gives us an overall picture of our user profiles, which in turn shows to
our Editorial Contributors the type of person they are reaching by posting
articles on Mondaq (and its affiliate sites) – meaning more free content for
registered users.

We are only able to provide the material on the Mondaq (and its affiliate
sites) site free to site visitors because we can pass on information about the
pages that users are viewing and the personal information users provide to us
(e.g. email addresses) to reputable contributing firms such as law firms who
author those pages. We do not sell or rent information to anyone else other than
the authors of those pages, who may change from time to time. Should you wish us
not to disclose your details to any of these parties, please tick the box above
or tick the box marked "Opt out of Registration Information Disclosure" on the
Your Profile page. We and our author organisations may only contact you via
email or other means if you allow us to do so. Users can opt out of contact when
they register on the site, or send an email to unsubscribe@mondaq.com with “no
disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate
registration form. This is a personalised service where users choose regions and
topics of interest and we send it only to those users who have requested it.
Users can stop receiving these Alerts by going to the Mondaq News Alerts page
and deselecting all interest areas. In the same way users can amend their
personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an
identifying user number. The cookies do not contain any personal information
about users. We use the cookie so users do not have to log in every time they
use the service and the cookie will automatically expire if you do not visit the
Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to
personalise a user's experience of the site (for example to show information
specific to a user's region). As the Mondaq sites are fully personalised and
cookies are essential to its core technology the site will function
unpredictably with browsers that do not support cookies - or where cookies are
disabled (in these circumstances we advise you to attempt to locate the
information you require elsewhere on the web). However if you are concerned
about the presence of a Mondaq cookie on your machine you can also choose to
expire the cookie immediately (remove it) by selecting the 'Log Off' menu option
as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example,
advertisers). However, we have no access to or control over these cookies and we
are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement,
and gather broad demographic information for aggregate use. IP addresses are not
linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or
its affiliate sites) are not responsible for the privacy practices of such other
sites. We encourage our users to be aware when they leave our site and to read
the privacy statements of these third party sites. This privacy statement
applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or
contests. Participation in these surveys or contests is completely voluntary and
the user therefore has a choice whether or not to disclose any information
requested. Information requested may include contact information (such as name
and delivery address), and demographic information (such as postcode, age
level). Contact information will be used to notify the winners and award prizes.
Survey information will be used for purposes of monitoring or improving the
functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our
site, we ask them for the friend’s name and email address. Mondaq stores this
information and may contact the friend to invite them to register with Mondaq,
but they will not be contacted more than once. The friend may contact Mondaq to
request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’
information. When users submit sensitive information via the website, your
information is protected using firewalls and other security technology. If you
have any questions about the security at our website, you can send an email to
webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode),
or if a user no longer desires our service, we will endeavour to provide a way
to correct, update or remove that user’s personal data provided to us. This can
usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will
post those changes on our site so our users are always aware of what information
we collect, how we use it, and under what circumstances, if any, we disclose it.
If at any point we decide to use personally identifiable information in a manner
different from that stated at the time it was collected, we will notify users by
way of an email. Users will have a choice as to whether or not we use their
information in this different manner. We will use information in accordance with
the privacy policy under which the information was collected.

How to contact Mondaq

If for some reason you believe Mondaq Ltd. has not adhered to these
principles, please notify us by e-mail at problems@mondaq.com and we will use
commercially reasonable efforts to determine and correct the problem promptly.